Business Deductions and "Write-Offs"

Business Deductions: The Basics of “Writing-Off” Expenses for a Schedule C Business

What is a “write-off”?

For many small business owners, keeping track of the finances is often the most intimidating part of operations. When colleagues or professionals talk about “write-offs”, what does that mean? In short, the IRS allows businesses to deduct the cost of expenses that are ‘ordinary and necessary’ for operating. These deductions directly off-set taxable income, reducing tax liability. Common deductions that are often taken include: supplies and materials, insurance, employee salaries, home-office deduction, travel, meals, etc. These costs must be directly connected to running the business, with the burden of proof being on the business owner in the event of an audit.

Ordinary and Necessary

We are able to define the term ‘ordinary and necessary’ expense, based on the Supreme Court ruling Welch v. Helvering, 290 U.S. 111 (1933).

• Ordinary – Common and accepted in your industry
• Necessary – Helpful and appropriate for your trade or business and for which there is precedence

Most Common Deductions

Here is a list of the most frequently taken deductions:

Supplies and Materials

Office supplies such as writing utensils, paper, and printer ink are fully deductible in the year it was bought. Bigger purchases, over $600 and whose lifetime exceeds one year, must be written off over the period of the object's expected life (depreciation). These items could include computers, printers, business machinery, etc. All supplies, bought for the sole purpose of using it in business, can be deducted from your taxable income.

Insurance

Business-related insurance premiums are fully deductible. These policies could be for malpractice, business liability, or property damage insurance, among others.

Salaries

Wages, salaries, commissions, and benefits like health insurance for employees are fully deductible business expenses. This does not include pay to the owner, since as a sole proprietor, you do not count as an employee.

Business Use of Your Home

Specific requirements need to be met in order to deduct expenses related to your home if your business is operating from there. Even when all requirements are met, limitations apply. For the home-office deduction to be taken:

Your use of the business part of your home must be:

• Exclusive-use,
• Regular-use, and
• Solely for your business

The business part of your home must be:

• Your principal place of business,
• A place where you meet or deal with patients, clients, or customers in the normal course of your business, or
• A separate structure (not attached to your home) you use in connection with your business.
• Home-office deductions are directly proportional to the area of the space used, compared to the total area of the house.

Travel

Whether you are traveling for a job or traveling to gain education in your field, when travel is directly related to business, costs can be fully deducted. This includes lodging, transportation, bag fees, etc. The only cost not fully deductible is travel meals. For tax purposes, meals bought while traveling for business are deductible at 50% of the cost.

Meals

Meals while with a client or co-worker (during the normal course of business) are deductible up to 50% for tax year 2025. As mentioned above, meals purchased while traveling for business are also 50% deductible. The purchase must be made at a restaurant.

This list of possible business deductions is not exhaustive. Allowable expenses are dependent on the industry. Reach out to our team today to make sure you are claiming all deductions allowable to your business!

Record Keeping

Whether you are a sole proprietor, an LLC owner, or a freelancer, the most important part of running a business is diligent and accurate record-keeping. Saving receipts, tracking business mileage, and reviewing monthly bank statements are all easy ways to stay organized and make sure your business is running efficiently. As your business grows, you may consider using accounting software to streamline this process. With diligent bookkeeping, you can run reports to help you see the health of your business and where possible points of improvement can be made.

Burden of Proof

In the event of an IRS audit, it is generally the responsibility of the taxpayer to substantiate whether they are entitled to the deduction they are claiming. This is another important reason for diligent bookkeeping. Per IRC § 7491(a), “the burden of proof may only be passed to the auditing IRS office when the taxpayer:

• Introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability,
• Complies with the requirements to substantiate deductions,
• Maintains all records required under the Code, and
• Cooperates with reasonable requests by the IRS for witnesses, information, documents, meetings, and interviews.”